Recently, credit has become more expensive in Brazil, as the rate of the Tax on Financial Operations for credit operations (IOF-credit) was increased immediately, by a Decree of the Executive Branch.
The rate for companies was raised from 1.5% (current daily rate of 0.0041%) to 2.04% (daily rate of 0.00559%). For individuals, it was raised from 3% per year (daily 0.0082%) to 4.08% per year (daily 0.01118%).
The Brazilian tax system allows 6 taxes to be increased by Decree of the President of the Republic (without going through Congress), and enforceable the next day, without violating the Constitution. They are: (i) Tax on Financial Credit Transactions (IOF-credit); (ii) Tax on Foreign Exchange Transactions (IOF-exchange); (iii) Taxes on Insurance Operations (IOF-insurance); (iv) Tax on Transactions relating to bonds or securities (IOF-securities); (v) Export Tax (IE); and (vi) Import Tax (II). There is also the Tax on Industrialized Products (IPI) which can be modified by decree, but is valid only after 90 days.
This “flexibility” is based on the Constitution, as these taxes are primarily regulatory (encouraging and discouraging conduct), and not aimed to be only for tax collection. Its objective is to stimulate or discourage consumption, regulate the balance of trade, stimulate or not the outflow and inflow of capital from and to abroad, that is, to promote the performance of certain conduct linked to the fiscal policy objectives of the government in power.
In view of this fact, to avoid surprise, and unforeseen losses, the entire investment position in Brazil must take into account that there are risks of an increase in these taxes immediately. Literally overnight.
Therefore, it is important to seek hedging instruments, insurance, financial contracts, among others, to protect and insure the operations, reducing the possibility of losses as a result of possible surprises arising from this form of taxation. If it is not possible to carry out these protective instruments, at least the investor has to monitor and calculate the risk so as not to face an unexpected situation.